TT Prompts Me To Contribute To Roth IRA, I Do This, Then TT Says I’m Ineligible, I Take It Out, Now What?

[kattmanndoo]

Want to know if there is any way I can avoid the 6% penalty that will apparently be applied for the excess Roth IRA contribution. Was working in Turbotax Premier and came to the Roth IRA contribution section prompting me that I should consider contributing in 2020 to save on taxes. I moved online to my brokerage account and transferred $6000 from my taxable account into my Roth IRA account and categorized it as a 2020 tax year contribution. Returned back onto Turbotax and then it tells me that I am not eligible to contribute anything since I am over the income limit this year. Frantic, go back to my brokerage online and transfer $6000 out of my Roth IRA account through a corrective distribution and back into my taxable account. I am now asking my brokerage to make certain it will be classified as a 'corrective' distribution (versus a normal distribution which I am not eligible for without penalty). Now Turbotax has displayed an additional $360 tax due for this “less than one hour” mistake. Is there anyway around this? Seems a tad harsh for an honest mistake like this that was quickly reversed.

[DanaB27]

Please make sure that when you enter the contribution in TurboTax that you also enter the withdraw of the excess contribution when TurboTax asks about it.

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “Roth IRA”
6. On the "You currently have a penalty" screen enter the contribution withdrawn  ($6,000)

Yes, please check with your bank that this was a return of excess contribution and that there were no earnings in this short amount of time since to avoid the 6% penalty you have to withdraw the excess contribution plus earnings.

[kattmanndoo]

Thanks Dana!   

You said:

"Please make sure that when you enter the contribution in TurboTax that you also enter the withdraw of the excess contribution when TurboTax asks about it."

I did this.  But TurboTax still registered an additional $360 in tax (assume this is 6% x $6000) penalty resulting from the initial ineligible Roth IRA contribution.   Is there any way around this?

[DanaB27]

When you enter the withdraw of the excess contribution ($6,000) and click continue, it doesn't take away the penalty? Can you check Form 5329 Part IV if it shows the penalty there?

If it doesn't show correctly then just delete the whole Roth contribution since you withdrew the excess contribution.

[kattmanndoo]

Ahh mea culpa.  When I checked the Form 5329, I apparently had input by mistake that this excess Roth IRA payment was for prior year excess contribution of $6000, not for 2020 tax year.  So when I went back in TT, I changed that and now I owe no additional $360.  Have to admit the prompts from TT on when you contributed Roth IRA and excess Roth IRA for 2020 or previous are confusing.  Thanks for your help!!!